Lesson 4 Everyday Decisions
Why You Buy What You Buy
Good afternoon, students. Today, I’d like to talk about a topic that concerns us all: Money!
Do you think that you spend money wisely?
The truth is that most people are not as rational as they think.
This is because human beings are easily influenced by psychological factors.
Let me illustrate my point through the following examples.
The Anchoring Effect
In 2010, Steve Jobs introduced the tablet computer to the world.
During the presentation, he said, “We’re going to price it under a thousand dollars,” which most people assumed meant $999.
He went on to talk about the features of the tablet and continued to justify why the tablet was worth buying.
At the end, he said, “I am thrilled to announce to you that the pricing starts not at $999 but at just $499.”
The crowd went wild.
The tablet suddenly seemed affordable to everyone.
He put the $999 price tag in people’s minds at the beginning so that the $499 price would seem a lot cheaper in comparison.
Steve Jobs used something called the anchoring effect to his advantage here.
It works because people tend to rely on the first piece of information they receive when making decisions.
Let’s say you are shopping for a new jacket and the first one you see is priced at $100.
That’s too expensive, as you don’t want to spend more than $50.
Soon after, you see a similar jacket from a different brand with a $70 price tag.
You think it’s affordable, even though the price is still beyond your budget.
This is because the first piece of information acts as an anchor that influences your decisions later.
Here’s another common example.
Look at the two pairs of sneakers.
They both are $50, but the way their price is presented is different.
Naturally, people are more drawn to the second pair.
This is because the original price serves as an anchor, making the discounted price appear more reasonable in comparison.
It is common for stores to use this kind of price anchoring as a way to encourage purchases.
The Endowment Effect
Now let’s move on to another interesting effect.
In an experiment, one group of students was given a coffee mug and a second group a chocolate bar.
Both groups were told they could exchange their items.
A third group wasn’t given anything and was told to choose either a chocolate bar or a coffee mug.
This group showed an equal preference for the two items.
About half of the group chose the chocolate bar, and the other half chose the coffee mug.
This suggested that roughly half of the first and second groups would trade their items.
But that’s not what happened.
Only about 10 percent of the students in the first and second groups were willing to make the exchange.
Why is this? This is because people value something more when they own it.
This is the basic idea of the endowment effect.
People are less likely to give up what they already have or trade it for something else.
Companies often use the endowment effect as a marketing strategy.
For example, many media streaming companies offer free trials to customers.
Once customers use the free trial, they feel ownership of that service, even if it’s temporary.
Consequently, they are likely to value it more and are willing to pay to continue to own it.
A free-return policy is another example.
Say that a company is offering free returns on a smartwatch within 30 days of purchase.
It seems like a good deal, since you can get a refund even after using the item.
But once you take this deal and establish ownership of the watch, it is unlikely that you will return it.
As we’ve seen, our spending can be influenced by factors that appeal to our emotions and mind.
I hope this short lecture gave you a chance to reflect on your own spending and helped you understand the reasons behind irrational purchasing decisions.
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